What is a Debt Consolidation Loan
This involves transferring debts with higher interest rates into one loan with a lower interest rate. To make this a worthwhile option the interest rate of your consolidation loan should be at a lower rate than your current credit agreements. This could enable you to make a saving on monthly repayments. If your credit rating has already been affected, you may find it difficult to obtain credit.
Whilst monthly repayments on a consolidation loan may be lower than the total of all the monthly repayments on your other loans this may only be because the loans are repayable over a much longer period of time. Again, the overall cost of the loan over the entire period can be quite high.
Things to consider
If you have lots of debt, or if you've missed payments on your debts, this will have affected your ability to borrow more money. You might find that the only way you can borrow more money is at a higher interest rate. This means that you could end up paying more money back over the lifetime (or term) of the loan.
Debt consolidation loans may be a good option if you have a lot of expensive borrowing on things like credit cards which carry high monthly repayments and high interest rates.
We recommend speaking to an expert debt adviser before taking out a consolidation loan.
Critera for a Consolidation Loan
- Have a number of debts you with to combine into a single loan with the goal of making a saving on your monthly repayments.
Advantages of a Consolidation Loan
- It could reduce the overall cost of borrowing.
- It could lower your monthly repayment.
- It will put all of your existing debts into one monthly payment for convenience.
Disadvantages of a Consolidation Loan
- The consolidation loan could carry a higher interest rate.
- You might have to pay it back over a longer time period, making it more expensive to pay off.